Who is driving the Chrysler-GM Merger?

Private equity firm Cerberus Capital Management is about to toss Chrysler into the lap of wounded auto colossus General Motors in a deal that is leaving Wall Street sharpies scratching their heads.

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Merging GM and Chrysler --- now over 80 percent owned by private equity firm Cerberus Capital Management --- would create a company with too many factories, dealers, vehicle models and product lines, leading to huge job losses, plant closings and dealership closings.

Is this how the free enterprise system is supposed to work? What's going on here?

"There's got to be more in it for GM than just Chrysler," said Erich Merkle, an auto industry analyst with Crowe Horwath LLP, an accounting and consulting firm. "If you put two auto companies together, both that are losing money, both that are losing market share, you've just got an auto company that's losing market share faster and losing more money."

Combining GM with Chrysler would match companies with similar weaknesses. "On the surface, it frankly doesn't make sense," said Aaron Bragman, an analyst with Global Insight. "The acquisition of Chrysler wouldn't solve any problems GM has and would only make some existing ones worse." Both companies have been hurt by their reliance on sales of trucks and SUVs. "It would be taking two cash-burning companies and put them together so they burn cash faster," said Erich Merkle, an auto industry consultant with Crowe Horwath.

In a recent Reuters news article, Gerald Meyers, a professor at the University of Michigan business school argued that any deal to sell Chrysler would clearly benefit Cerberus, "Cerberus, to begin with, is impatient money. Their way of operating is to get in, make a killing and get out. Well, they got in, they got killed and they've got to get out."

Chrysler, a privately held company, lost an estimated $510 million in the first quarter and $1.6 billion last year. Its sales are down 25 percent so far this year, the worst drop of any major automaker.

According to US News and World Reports, most analysts believe that the deal currently on the table would give GM control of all of Chrysler's automotive operations, and give Chrysler's current owner, Cerberus Capital Management, complete control of both companies' financing arms.

For Cerberus, control of GMAC Financing is the plum in the pudding and the real reason for the merger.

Global Insight's Bragman said unloading Chrysler would benefit Cerberus since the private equity firm would end up owning GMAC just as the $700 billion U.S. government bailout begins operations. "They would get rid of an auto company that has weighed on their results, and they would get full control of GMAC just as the government is about to come to the rescue."

It is important to recall that in 2006, after purchasing the company for 36 billion dollars and then sinking billions and billions of dollars into the company, German auto giant Daimler sold Chrysler to Cerberus for less than 7 billion dollars. Today, the manufacturing side of the once mighty company is practically worthless.

If Cerberus doesn't dump the company soon, the cost of Chrysler's money-losing day-to-day operations, worker pension liabilities and on-going product development and reorganization costs could doom the once high-flying private equity fund. If Chrysler failed, thousands of workers would be thrown out of work and retired workers would see their health care and retirement benefits put at risk.

But why would GM so easily cede control of its potentially profitable finance business in return for such an obvious pig-in-a-poke?

Autoblog's John McElroy writes that, "Cerberus is in the driver's seat." Last week, Cerberus-controlled GMAC announced that it would no longer lend to anyone with a credit score under 700, "which effectively wipes out the vast majority of GM car buyers."

GMAC has also tightened its lending standards to dealers. Most dealers don't buy cars from automakers with cash and then sell them. Instead, they finance the cars they sell and use the proceeds from the sale of a car to pay off their own loan for that car. "If GM's customers can't buy cars, and if GM dealers can't buy them either, then GM runs out of cash before Christmas." McElroy suggests the merger is part of a Cerberus plan to force GM to take Chrysler.

GM is burning up more than $1 billion in cash per month and has posted losses of $18.7 billion through the first half of 2008. Across both companies, auto sales are morbid; the sole exception being the newly redesigned mid sized Chevy Malibu, whose sales were up 37 percent.

Following the November 4th elections, you can bet that the newly merged Chrysler and General Motors will be in Washington looking for a handout. John Snow, President Bush's second United States Secretary of the Treasury, is chairman of Cerberus Capital Management and a well-connected Washington insider. In exchange for taking on Chrysler, some analysts envision that GM could be given access to low-rate emergency borrowing from the Federal Reserve's discount window.

And there is always the possibility of yet another Federal auto industry bailout, on top of the recently approved 25 billion dollar loan program that was secretively passed by Congress in late-September, while most Americans were focused on the systemic failure of the U.S. financial system and the the wisdom of approving a 700 billion dollar Wall Street bailout. The 25 billion dollar loan program was intended to help the Big Three automakers "retool aging auto plants to make hybrids and other fuel-efficient vehicles."

The terms of the program are extraordinarily feeble, allowing auto makers to take until the year of 2020, or twelve long, fuel consuming years from now, to bring the average fuel economy rating of American-built cars to 35 miles per gallon. Repayment stipulations are weak. But this bailout is chump-change compared to what the future holds for the unsuspecting taxpayer. According to US News and World Reports, "Bailout or not, the loans might be just the start of what Detroit needs."

At the end of this deal, GM will be stuck with Chrysler, an albatross of a company that is for all practical purposes, worthless. Cerberus will end up owning a recapitalized, soon-to-be-profitable GMAC Financing. And the American people? They'll get the last thing remaining---the shaft.

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